A little error here or there may not seem like a big issue, but it can add up to major discrepancies in your bookkeeping records. Preventative accounting measures help you spot those errors before they escalate to something bigger. A bank reconciliation compares the amount of cash recorded on your financial statements to the amount of cash recorded by your bank to ensure both figures match..
Bank reconciliations offer an effective internal control system, so don’t miss your opportunity to do them regularly. A bank reconciliation should be performed periodically and is most frequently completed at the end of the month. You may choose to handle the process on a weekly basis to keep a better watch on your accounts. Weekly bank reconciliations can help you spot an issue much sooner than waiting until the end of the month.
When you do your weekly bank reconciliation, you can expect to spot some differences between the bank balance and the balance per books. Most of the time, the discrepancy comes from timing issues rather than an actual error. For example, you might send out an invoice to a client, which you record in your books. Since you don’t receive the payment immediately, it doesn’t show up in your bank account yet. That creates a discrepancy in the balances. Going the other way, you might submit a cheque for an invoice you owe, but the money doesn’t actually come out of your bank account until the payee deposits it and your bank processes it. So your bank account may show a higher balance than your books indicate until that cheque clears.
As part of the bank reconciliation process, you adjust your balance per books for bank activity by posting journal entries. You also adjust the bank balance for deposits in transit, outstanding checks, and banking errors. After you adjust both records, the two figures should be the same. If you come up with different numbers, you need to dig a little deeper to uncover the source of the discrepancy.
Bank reconciliations should be incorporated into small businesses that have numerous cash transactions. The bank reconciliation can help detect fraud that may occur when a single employee handles the books. Although a bank reconciliation is unable to detect fraud due to collusion, it should still be incorporated to detect banking errors. For instance, your bank may deposit a cheque into the incorrect bank account, which throws off your balance. Without confirming the amount that should be in your bank account, you might not detect the error.
Get into the habit of doing bank reconciliations frequently to spot issues before they affect your cash flow. Using QuickBooks Online helps you easily pull up your financial records to compare with your bank statements. 4.3 million customers use QuickBooks. Join them today to help your business thrive for free.